Greetings. Welcome to Leidos' Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. At this time, I'll turn the conference over to Stuart Davis from Investor Relations. Stuart, you may begin.

Thank you, operator, and good morning, everyone. I'd like to welcome you to our second quarter fiscal year 2024 earnings conference call. Joining me today are Tom Bell, our CEO, and Chris Cage, our Chief Financial Officer. Today's call is being webcast on the Investor Relations portion of our website, where you'll also find the earnings release and supplemental financial presentation slides that we'll use during today's call. Turning to Slide 2 of the presentation, today's discussion contains forward-looking statements based on the environment as we currently see it, and as such, includes risks and uncertainties. Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially. Finally, as shown on Slide 3, during the call, we'll discuss GAAP and non-GAAP financial measures. A reconciliation between the two is included in today's press release and presentation slides. With that, I'll turn the call over to Tom Bell, who will begin on Slide 4.

Thank you, Stuart, and good morning, everyone. It's great to be with you all again today to report a record quarter for Leidos. In this quarter, organic growth remained strong, achieving a record adjusted EBITDA margin of 13.5%. Year-to-date, we've delivered industry-leading profitable growth, with adjusted diluted EPS 50% higher than last year. The team is doing an excellent job converting our earnings into cash. In turn, this has allowed us to continue to deploy capital to grow shareholder value per our plan. We're now halfway through our commitment to repurchase $500 million worth of shares this year. I'm also proud of the fact that this robust first half of 2024 allows us to once again raise guidance for the full year. Chris will give you a complete update on our financials and our guidance later in the call. One year ago, on my first call with you all, I laid out four focus areas to begin Leidos' journey to best-in-class performance. Instilling in Leidos a "Promises Made, Promises Kept" culture, sharpening our strategy, improving the performance of previous acquisitions, and enhancing our ability to win new business. I'd like to take this opportunity to update you on the meaningful progress we're making in these areas. I see this progress as foundational to putting ourselves in a great position to execute our forthcoming Leidos North Star strategy. First, our team has fully embraced a "Promises Made, Promises Kept" philosophy. As part of this, we've made a firm commitment to each other to drive operational improvement, profitable growth and robust cash conversion. The evidence of this culture taking hold is clearly visible in the 12-month trend of our results, and our second quarter results, summarized earlier, that are simply our best yet. Our currently strong and strengthening balance sheet puts us…

Thanks, Tom, and thanks to everyone for joining us today. Our second quarter results demonstrate yet again the power of our focus on profitable growth and cash generation. With clear intent, our team is driving current financial performance while also building for a more prosperous future. Turning to the income statement on Slide 5. Revenues for the second quarter were $4.13 billion, up 7.7% year-over-year. Robust revenue growth reflects the benefits of both the strong demand environment and historically low levels of attrition. The highlight for the quarter was margin performance. Adjusted EBITDA was $559 million for the quarter, up 33% year-over-year, and adjusted EBITDA margin increased 260 basis points to 13.5%. We achieved this record margin through business mix and indirect cost management. Program-level execution was generally very strong, but EAC adjustments were a net $12 million headwind. Non-GAAP net income was $360 million and non-GAAP diluted EPS was $2.63, up 43% and 46%, respectively. Below-the-line items had no material impact on net income or EPS. Turning to the segment view on Slide 6. National Security and Digital revenues increased 1% year-over-year. We saw volume growth on our Sentinel and DES programs, as well as several contracted research and development efforts. You may also recall that last year we had spikes in some of our large digital modernization programs, notably NGEN and AEGIS, which created a tough year-over-year comparison. National Security and Digital is also the segment most impacted by protests. Still, accelerating growth in National Security and Digital is a major focus of the ongoing strategy discussion. National Security and Digital non-GAAP operating income margin increased 20 basis points from the prior-year quarter to 10.4%, with some milestone achievements, strong cost control and excellent program execution. For the first half of the year, National Security and Digital has…

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] And our first question coming from the line of Mariana Perez Mora from Bank of America. Your line is open.

Good morning, everyone.

Good morning.

So, my first question is on managed healthcare and the margins there and incremental margins there are really, really strong. How should we think about -- what is the moat that you guys have as you go ahead to this, like, competition and recompete coming? Because I could imagine like the installed base you have that actually allows for these incremental margins actually pose a really strong moat, but what else from a technical perspective you think that you have in your advantage to keep a good share of, like, this really growing market?

Thanks, Mariana. Really appreciate your question, and obviously, a part of the portfolio we're very, very proud of. The performance we're achieving in this part of the business is directly related to our passion to serve the nation and its veterans and our investment in technologies ahead of curve, so that we were poised to take additional volume as we came out of COVID and had an opportunity to serve more and more veterans. We're very proud of this and we're very proud of those investments that allow us to serve more veterans. And our modeling for what the output and input of veterans that need case management increases and stays the same over the coming years. So, we're very bullish on the absolute volume. What we're doing to affect our future in that overall volume is ensuring that VA sees us as their partners. So, we've leaned in to help make sure that they understand we are invested in their success and their budgetary challenges that they have right now. And that positions us well for this recompete that's coming in the third or fourth quarter, probably more like the fourth quarter. We expect the customer to expect us to continue to serve the veterans the way we are and we're very bullish about the opportunity for us to continue to invest in technologies that serve our customers even better. So, the challenge that we've given Liz and her team is not how to hold on to this business, but how to increase this business over time. So, as part of our year of deep strategic thinking, we're not seeing 2024 as the peak of this business. We're seeing it as a plateau of this business from which we continue to springboard. That's the challenge we've given Liz, and her and her team are responding very favorable to that. Chris, do you want to add anything?

Yeah, Mariana, I would -- Tom touched on the technology aspects, and clearly, that's been a major focus that we've added to the equation under Liz and Larry Schaefer's leadership over the past several years. But beyond that, we've been a longstanding partner here. We've won this recompete multiple times over. There's investments that we've made in physical locations, mobile locations, provider networks, critical staff, all of those things come to bear. And then, of course, the customer is going to evaluate what has your performance been. And, clearly, we can demonstrate a track record of strong performance with great customer satisfaction, great accuracy, throughput, all of the key metrics the VA is looking for. So, we're sharpening our pencils to make sure that we're putting ourselves in the best position possible to defend this critical work for ourselves, but obviously, it's an area we feel very encouraged about our position on.

Thank you. And if I may, my next question is about the -- as you focus on the account managers and capture these teams, what are the challenges you have on hiring and training the talent, both internal and people that you hire?

There's really a war for talent of these type of people, but we are bound and determined, as I've mentioned on previous calls, to make sure Leidos is the destination of choice for the best and brightest talent that's out there in the ecosystem. And so, what we've started to see, I mentioned, we've hired dozens of these account managers and we've allocated hundreds of people to be our solution architects for our new solutions. We have an environment in Leidos that is compelling. We are an employer of choice. And the more we win, the more people will want to be on the winning team. So, it's not so much a question of challenges. It's a question of helping them understand the opportunity that's in front of them for joining Leidos and the investment we're going to make in them to make a difference. People that are in this line of business are in this line of business because they want to serve their customers. And the most disenfranchising thing you can do for a customer -- for a person who is passionate about serving customers is not fully support them. So, Leidos is creating an investment strategy and we're investing in the people, processes and tools that allow them to affect their customers positively and bring solutions to them differentially. And that is the most compelling thing about coming to work for Leidos that we're hearing from others and attracting great talent as a result.

The only thing I'd add, Mariana, to that is, of course, a very good question, and Tom is right, I mean screening the right people to have the passion to want to serve the right customers' missions is critical. The area that we need to help them the most as they get into Leidos, there's clearly a tremendous amount of capability that we have that can be brought to bear to support those customers in multiple ways. Helping them understand the breadth of our offerings is an area that we are continuing to invest in and that's the reason why partnering them up with so many solutions, architects and other people that have been down that road is critical, but there's technology that's behind that as well. So, Gerry Fasano leads our growth office. He's very focused on that rollout plan and we're excited about that taking a lot of momentum here in the second half of the year.

Thank you very much for the color.

Thank you. And our next question coming from the line of Matt Akers with Wells Fargo. Your line is open.

Yeah. Hey, guys, good morning. Thanks for taking the question.

Sure, Matt.

Tom, I wanted to follow up. You talked about kind of some of the portfolio pruning initiatives you're kind of looking at. Kind of could you give us an update on where we stand there and kind of what inning we are at that whole process?

Yeah, sure. Thanks, Matt. As I said in my prepared remarks, we're done with the Leidos proprietary hypothesis of the future. This is our own exclusive proprietary view of what the world looks like in 2033 and therefore, what are the challenges our customers are facing in 2028 in order to affect that future. We're halfway through building our business strategy as a result and affected by that view of 2028. So, it's very much a today forward view and a future back view meeting in 2028. As we are starting that, Chris trailed in his comments that we've put a small investment fund out there, because ideas are starting to emerge from this year of deep strategic thinking that we know are winners. These are areas that we are going to be investing in, in the future. And although we're not going to articulate it, we're putting seed corn out there now in those areas, so that we're not waiting for the whole process to be done to do the obvious compelling things we want to do to affect our future here. So, we're very excited about that. Now, the overall objective and the parameters of our year of deep strategic thinking, I think I mentioned it in our last call, it's not going to be a pivot for Leidos, a 90-degree pivot or 180-degree pivot, it's going to be variations on the cores that we're in now. And so, we're going to be doubling down on our core strengths. We're going to be really focused on repeatable business models. We're going to really focus on speed. We know that our customers are very concerned with speed, but they're concerned also that the people they hitch their wagons to have to have the scale to solve complex problems differentially.…

Great. That's helpful color. Thank you. And I guess if I could do one more, just latest thoughts on upcoming recompetes and anything big that we should be watching for this year?

Yeah, Matt, obviously, we talked a little bit, of course, about the VBA exam business and that's top of mind as we navigate to the end of Q3 into Q4. Beyond that, I mean, there's not as many needle movers. There is an exciting opportunity in the hypersonics arena where Common-Hypersonic Glide Body and TPS contracts converge and we look forward to extending our work there with an important customer. There is an integrated logistics support contract with the TSA that -- whether it's late this year or first quarter next year and obviously, you can imagine that's a partnership between our C&I business and work we do elsewhere that specializes in the logistics side. And then, looking ahead to next year, I think the other big one I'd point out is the DHMSM contract. The follow-on to that obviously is an important piece of work for us. The team is already in the proposal bids, making sure that we're putting our best foot forward, but that is sometime in the middle of 2025 -- early-to-mid '25.

Hey, just to pile on a bit, Matt, sorry to have a reclama here, color for our pipeline, we've got $15 billion in submits in the second quarter. We've got $26 billion-plus awaiting customer decisions. In the next 12 months, we have a pipeline of almost $70 billion, and our whole qualified pipeline approaches $200 billion. So, we're very excited about the opportunities to grow, and that's why we are very much focused on priming the pump of our business capture teams with talent who can differentially go out there and get this business.

Great. Thank you very much.

Thanks, Matt.

Thank you. And our next question coming from the line of David Strauss with Barclays. Your line is open.

Thanks. Good morning, everyone.

Good morning.

Hey, David.

A question, Tom, on National Security and Digital. I think you guys hit on the slow growth there in the first half, but it sounds like you're talking about an acceleration in the second half, but at the same time it sounds like you're signaling lower margins in the second half. So, could you just dig in exactly kind of what's going on there in the second half versus the first half? Thanks.

Yeah, our National Security and Digital segment is arguably the core of the core of Leidos. And it is an area that we've put two of our most talented leaders, Roy Stevens and Steve Hull. And they are partnered to make sure that we are focused on how we help our customer in deterrence and being the smartest government on the planet. We don't think that there is a challenge here with the pipeline. Obviously, this is a business where we've won in the past. We know we can win in the future. The margins in this type of business are never going to be over the top. They're going to be in the low double-digits. But what we have in this segment, in my mind, David, is a revenue growth story. There is much more we can do to help our customers in these areas and our customers -- this comes back to the speed and scale conversation I had before, our customers are increasingly aware of the fact that the scale of the problems that they have requires people who have speed and scale to solve them. So, Roy and Steve are partnered with the whole enterprise with Jim Carlini in Technology and Gerry Fasano in Growth to make sure that we're leaning into serving our nation in this area and not looking to back off in any way. So, if we gave you an indication of softening here, that's probably not the guidance we'd want to give.

Yeah, David, I'd just add on to that. I mean, I think part of that is because we had an excellent first half of the year on margins. And there are some things that can move around, around milestone timing and things of that nature and how much special project work we see on programs like NGEN, but there's no fundamental issues here. And, in fact, we're actually very encouraged, to Tom's point, this will never be our highest-margin business, but we do see upside here over time and the teams are investing in more repeatable models in the dig-mod space and those will be some unlocks to future margin upside that we're expecting. But I don't want to overlook some important wins that did take place in the quarter. Getting the next Defense Enclave Services task order under contract is critical for us. That is a key unlock for Steve and his team to drive growth into that important program. So that clears the way for 13 additional DoD Fourth Estate agencies to migrate on to the network over time. So, we've been waiting for that and we're excited about what comes behind that as we get into '25 and beyond.

Great. Thanks for that color. Chris, quick follow-up. You noted a pretty good working capital performance in the first half of the year relative to the prior year. How are you thinking about working capital through the rest of the year?

Yeah. So, I'm very pleased with the team's performance on cash management. I think we've done an excellent job. And last year, we made some really strong gains on managing the payable side and more industry standard terms with our vendors, and we've made some more progress in that regard this year. We've been attacking the DSO side. I would say, it's steady as she goes. I don't see anything at this point in time that would be a major use of working capital. We're always interested in great ideas that could be accretive to the business. But right now, we're focused on Q3 and Q4 are usually our strongest performance quarters and I expect this year to follow suit.

Thanks very much.

Thank you. And our next question coming from the line of Cai von Rumohr with TD Cowen. Your line is open.

Thanks so much. And Tom, terrific results.

Thank you, Cai.

So, you guys have mentioned that you expect Health -- the medical exam business is not at a peak, it's at a plateau, but given [indiscernible] at least early on next year, we'll be under the new contract. Should we assume that the margins are going to be lower? Because I assume it takes time until you get to the point where you kind of are doing well in terms of the incentives and all of that. So, is it likely that profits in Health will be down next year?

I hate to answer your question this way, but we don't know is the real answer, because we're awaiting the RFP that tells us what the customer actually wants to do. We know that the contract comes to an end at the end of this quarter. We are awaiting the RFP for the future. We're not sure if that's going to be -- if we're going to have an extension to the current contract, a new contract for a fixed period of time or a new contract for a long period of time. And we don't know how the VBA is going to incentivize industry to bring its best and its most throughput to our veterans. So, we have no reason to model, in our own minds, a decrease in profitability, but there is a big unknown while we await the RFP.

Yeah, Cai, I'd only add, I mean, what we do know is that the VBA has asked Congress for more money, right? And that's a strong signal that they see the demand out there, more veterans need care, need throughput, and that's always been the priority. Now, we're in, call it, a temporary situation where they have to navigate this funding gap. Tom is right, I mean, a lot of things will become clearer for us as we get through the next quarter or two, but you can imagine that our early conversations with Health team about '25 is how do we grow off of '24 levels. And that's the way we're approaching it. And so, everybody's clear-eyed around looking at every opportunity to make sure we optimize our performance levels there and elsewhere to continue to grow earnings.

Perfect. One quick one on your new business. You had $15 billion of submits, you have $26 billion awaiting. What should we think about in terms of your book-to-bill? You also have $3 billion in protest. I think there's a big classified award in there. Should we see book-to-bill pick up in the second half? And are you guys chasing some of the large takeaways you've been so successful in?

The team remains committed to a book-to-bill ratio slightly better than 1 for the year of 2024 and they are determined to meet or exceed that. There are some big swingers in there and it's possible that if many of these break our way, we'll far exceed the book-to-bill ratio that they have. But Cai, again, in my earliest call I talked about the fool's mission that chasing quarterly book-to-bills was in my mind, and the fact that what we should be focused on is building a quality backlog over time of profitable business. And that's really what I'm more incentivized and really focused on with the business capture team; how do we look at that trailing 12 months of book-to-bill and how is that looking at our future growth potential with the backlog that we've got on the books? The team is very focused on that. As I mentioned in my prepared remarks, we're doing a better job of bidding for the things that will reward Leidos adequately for technology and the capability we bring, and I feel as if many of those that are in our backlog will start to break our way. So, we're very bullish on the future without getting ahead of our skis.

Terrific. Thank you so much.

Thank you. And our next question coming from the line of Peter Arment with Baird. Your line is open.

Yeah, thanks. Good morning, Tom, Chris, Stuart.

Hey, Peter.

Terrific results. Hey, Tom, maybe just the focus on Commercial & International, just you had the write-down in the quarter. Absent the write-down, you would have had pretty good margin performance. Maybe just talk a little bit about, I guess, either the write-down or just confidence level in kind of the back half of the year, where your margins are, I guess, expected to be better? Thanks.

Yeah, sure. Thanks. Well, first of all, this is very much the benefit of having new eyes and a new organization structure that's looking with fresh perspectives on the business. As Chris mentioned, this is primarily two fixed price contracts that we have in the UK that through increased and very robust conversations with the customers, we've decided we have to take a write-down because of changing requirements and schedule slippage. But we feel confident that we've also taken a lap around the block and looked under the rocks to make sure that there's not more. So, Vicki and her team are doing a great job scrubbing the portfolio. She's cut the number of watch programs in her portfolio by half in these first two quarters. And we feel very bullish about the prospects for her business. I mentioned and I featured in our last call last quarter that we want to make Leidos synonymous with AUKUS Pillar 2. And as you heard in this call, we've taken some steps by really allocating and hiring some talent that can really get after making that so. So, Vicki and her team are very focused on bringing the team together around AUKUS. We've got excellent customer touchpoints in the UK and Australia, and obviously, here in the United States, and we're very bullish on the opportunities for Commercial & International. Also, I want to tip a hat to the SES team. They had a very good first half of the year and that is all credit to Mike Van Gelder and to Vicki, who have really gotten their arms around that business and really made sure that we're on a solid platform from which to grow. So, very optimistic about where that business is heading in her portfolio also.

The only thing I'd add there, Peter, is the piece of the business there that Tom didn't mention is our commercial energy business and that has been performing extremely well and tends to have a pattern where the back half of the year is stronger on a margin basis. There are some critical incentive and award fee determinations that happen sometime later in the year. So, a well-run business that we expect to continue to deliver great results, and the other piece of the portfolio we believe are on strong footing for the second half.

Yeah, that's very helpful commentary. And then just Tom, just quickly the DoD continues to make a lot of evolving changes or strategies around Counter-UAS and I know that Leidos through Dynetics has some exposure here. How are you guys thinking about the portfolio when you're thinking about the Counter-UAS business today?

It's a very timely question, Peter. I have a classified briefing later this week to dive deep into all our capabilities for Counter-UAS. Obviously, IFPC and Enduring Shield is the thing we talk most about, about Dynetics. But within our Leidos Innovation Center, the LInC, and our Defense Systems segment, we've got a myriad of other technologies that can affect Counter-UAS capabilities for our customers. So, we're going to take a step back, kind of look at everything that we've got in the pantry when it comes to technology and decide, are there some things we should be investing in this year to help our customers with this very, very vexing problem that they're uncovering now. So, very bullish about our opportunity to serve. The question is, do we have something in the pantry that will be compelling for the customer.

Appreciate the color. Thanks, Tom.

You bet.

Thank you. Our next question coming from the line of Jason Gursky with Citi. Your line is open.

Hi. Jeremy Jason from Jason Gursky's team.

Hey, Jeremy.

Hello? Sorry.

Go ahead, please. Go ahead.

I kind of have a math question. Could you walk us through the pipeline for each of the segments for '25 and '26? And kind of give us an update on production capacity and how that might impact growth outlook? Thanks.

Well, Jeremy, Tom gave you some high-level metrics. We're probably not going to be able to dissect the pipeline by segment by year for you, but rest assured that we feel it is robust and each of the segments has opportunities north of $1 billion all the way down to some strategic small opportunities in the tens of millions of dollars. So, we like our positioning there. The big ticket numbers again, $26 billion pending, 200 overall pipeline, approximately $70 billion we expect to be decided in '25, two-thirds of that being new work and takeaway, great position on our BD side and the growth teams are highly energized. As it relates to production capacity, the good news is the Dynetics team had built up some capabilities down in Huntsville. We feel like we've augmented that in areas like the wide-field-of-view satellite payload needs. We've got a facility that we've been waiting to fill up from a capacity standpoint on the IFPC side, the Enduring Shield. So, we're excited about the ability to take full advantage of what we've got in place there. And then, we spoke previously on the SES side about our new Charleston facility that we toured just in the last few months. It's a great facility that the team has built out and in fact there's plenty of room to expand capability even in the footprint that we built out. So, I don't see a big need on major investments in those areas. It's always something that we look at and we're happy to entertain great ideas if there's a compelling expansion to the pipeline, but we're in good shape to be able to expand up to the needs that we foresee over the next 18 months or so.

And just to pile on a little bit on that, Jeremy, the $26 billion of pending awards we have, I mean, that is not only several home runs that we've got on deck, but 40, 50 big awards of $50 billion -- $50 million or more. So, we've got lots of proposals in work. And so, the batting average should be relatively positive on that. We've used the example internally of -- we've had a business capture problem and so to break that inertia, we have inputted energy, energy with new talent, energy with new processes and tools. And now we're very excited about the momentum that's going to build over the next 12 months to 15 months. You'll appreciate that in our customers' environment decisions take time and ultimately they're almost all protested. And so, it takes a little while before the flash of energy to break inertia becomes the bang of the momentum of actual wins, but we're highly confident that we're in a good place and Gerry is the right leader to bring us forward.

Thank you so much.

Thank you.

Thank you. And our next question coming from the line of Ken Herbert with RBC. Your line is open.

Yeah, hi, good morning. Tom and Chris, really nice quarter.

Hey, Ken.

Thanks, Ken.

Hey. I just wanted to first start off, you obviously raised the guidance with the exception of the cash from operations. Is there anything in particular when you think about the cash flow outlook in the second half of the year we should keep in mind or maybe driving a little bit more conservatism there?

Yeah. Hey, Ken. Chris here. Obviously, we stepped up our cash guide last quarter by $200 million, a pretty significant increase. We're clearly focused on converting these extra earnings that you're going to see here into cash and there's always the chance that some of that comes in January versus December. So, at this point in time, with two quarters to go and two-thirds of our cash commitment for the year ahead of us, we just didn't feel it was prudent to increase the guidance at this time. But there's no headwinds that we're foreseeing, we're just kind of managing it down the middle.

And just to build on that, right, at the beginning of the year, we talked about the uncertainty in the market heading into an election year. Obviously, we're still dealing with some uncertainty. We're still dealing with customers that have budget challenges and issues around their performance of their business. And so, while we're extremely pleased with the first half of the year that allows us to raise our guidance again, we're not going to get ahead of our skis or over promise. We're going to keep our powder dry to make sure that the third and fourth quarter deliver the way we expect them to.

That's great. Thanks, Tom. And if I could, it sounded like from your prepared remarks that there could be upside as well to the expected buyback this year, the $500 million. I guess maybe part of that's timing, but can you just reset in terms of what you might want to see to deploy more capital there? And maybe any change in how you think about the framework around returning capital to shareholders considering some of the investments you're talking about here today? But great, great cash in the quarter, really nice.

Yeah, sure. And great cash in the quarter is the reason that I only trailed it and didn't commit to more. We had great -- you know how the flow of the business comes. It's a little bit like a sine wave when it comes to cash coming in. And typically, the third quarter is a relatively robust cash quarter for our business. We had a very robust second quarter. So, I recommitted. We're committed to repurchasing $500 million worth of shares this year. We're halfway through that now. We'll continue that program. If the cash comes in per historical norms in the third quarter that may give us a chance to revisit it. But more on that as the third quarter unfolds and we look toward the fourth quarter. The one thing I will say Ken, just because to state the obvious, but not to assume it is stated, fear not, we're going to be -- continue to be prudent allocators of cash in a shareholder-friendly manner. And so, don't worry about this burning a hole in my pocket as my grandmother used to say.

Perfect. Thank you.

Thanks, Ken.

Thank you. And our next question coming from the line of Noah Poponak with Goldman Sachs. Your line is open.

Hey, good morning, everyone.

Hi, Noah.

So, I guess the EBITDA margin has to be a lot lower in the second half than the first half to be at the 12% for the year, and the second half EPS as a percentage of the total would need to be a lot lower than it's been historically to be in the earnings range for the year. Obviously, the Health & Civil margin pretty strong in the second quarter, but you're also absorbing this C&I margin. So, can you maybe, Chris, just walk me through that? I mean, what -- which segment's revenue growth or margins really moderate a lot? How are you thinking about that Health margin through the back half of the year?

Sure. No, thanks, Noah. And we get it, right, excellent first half of the year, excellent full year guidance, but the second half relative to the first half looks a little bit more modest. But stepping back, the guidance implies, let's call it, roughly 11% margins in the second half of the year. And just six months ago, we opened the year with an expectation of 10.5% to high 10%s on margin. So, we're pleased to be able to look ahead and say, even in a scenario where the disability examination work levels perhaps come down, we still see line of sight to, let's say, 11% margins kind of being delivered by the business. And that's really the primary reason, right? As we look at as the VA is kind of navigating the next few months, we're expecting those throughput to be lower, and then we've allowed ourselves some cautiousness as we look into the fourth quarter around how quickly that will snap back. So, there are certainly scenarios where that could do much better, but that's the primary backdrop. As we look at the rest of the portfolio, obviously, we did signal that National Security and Digital has had a very strong first half on margins. There's always the potential those are able to sustain at those levels, but again, looking at some of the milestones, we pulled back a bit on that for the second half guidance. And then, the last piece, Noah, that I'd point to is the investments. Taking advantage of this opportunity to make sure we're funding an innovation fund that we can dial up or dial back depending upon the progress that's being made and really make sure that we've got a jump start on 2025. So, the fundamentals of the business across the board are in great shape. We feel good about that. In fact, there are some areas still on the optimization side that we still have ahead of us to get after on indirect cost management. So, I feel like we're really well positioned as we look ahead at '25.

Noah, I'll just foot stomp something Chris said in his prepared remarks, and that is our 2Q profitability was aided by having two quarters worth of incentives in – hit in the second quarter. So, the profitability of that business was enhanced because of that. The underlying business remains as solid as it ever has been.

Okay. And Chris, the VBA, I guess, it sounded like you guys are saying you don't have an RFP yet. It sounds like recompetes imminently without an RFP yet.

Yeah.

It's maybe unlikely, I don't know. Is that sliding out? Does that make an extension more likely?

That's how we see it. It's been fluid. We've been rehearsing and preparing and can adapt to any scenario, but it's becoming more and more likely that there is an extension of some kind versus recompete, but we can't commit to that. We're just prepared for whatever the VA is able to do in a short order here.

But you still expect them to slow down the activity while that's being sorted out?

At least until -- they've got a new government fiscal year and that'll help them get into a new budget environment. Now, they -- again, they could be aided by Congress in the near term, but our baseline assumption at this point in time is activity levels are more muted over the next few months.

Okay. Thank you.

Thank you.

Olivia, it looks like we've gone beyond the hour. So, I think we'll call the Q&A at this point. So, I want to thank you for your assistance on the call and thank everybody on the call today for your interest in Leidos and we look forward to catching up with you in the future.

Ladies and gentlemen, that does [conclude] (ph) our conference for today. Thank you for your participation. You may now disconnect.